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Optimal Financial Structure and Asset Prices

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Abstract

I study the welfare properties of competitive equilibria in an economy with financial frictions. In the model, entrepreneurs raise funds to set up a firm, then they exert effort, and finally they trade assets. Private financial contracts do not internalize their impact on asset prices. On the one hand, lower prices depress the liquidation value - the collateral effect. On the other hand, lower prices boost entrepreneurs' incentives to achieve good performance - the incentive effect. I show that the latter effect outweighs the former, implying that a decrease in asset prices improves welfare.
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Dates and versions

hal-00760750 , version 1 (04-12-2012)

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  • HAL Id : hal-00760750 , version 1

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Johan Hombert. Optimal Financial Structure and Asset Prices. 2012. ⟨hal-00760750⟩

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